Land and Building Tax: A Catalyst or a Hindrance to Development?
"Land and Building Tax" is a tax tool aimed at addressing income and asset inequality in Thailand. But does it truly solve problems in Bangkok? And how does it impact businesses and investors?
The Land and Building Tax of 2019 is an innovative tax tool initially designed to tackle income and asset inequality in Thailand. This tax has the potential to generate revenue for local administrative organizations, which can then be used to develop their respective areas directly, thereby helping to reduce economic disparities between regions.
To clarify these issues, the author will limit the analysis to the case of Bangkok.
Bangkok is not representative of Thailand as a whole; it faces unique challenges compared to other provinces. These include excessive concentration of economic activities, traffic congestion, pollution, high living costs, expensive land leading to overcrowded communities, and rampant drug-related crime.
Addressing the issues of a major city like Bangkok requires a substantial budget compared to other provinces due to its distinct economic development and public service needs. Therefore, Bangkok may need to impose higher land and building taxes than other areas to improve the quality of life for its residents. High tax rates can also reinforce urban planning laws to mitigate excessive economic activity concentration, thus helping to reduce spatial economic inequality.
At this point, many may want to argue that this will negatively impact businesses and the residents of Bangkok, who must bear a higher tax burden during challenging economic times like the present. The answer is that this does not entirely conflict with the needs of businesses and Bangkok residents if most of the additional tax revenue is effectively reinvested (without leakage) into public services that enhance the quality of life.
Having discussed the benefits of the land and building tax, it is also important to address its drawbacks, as neglecting them could harm the economy and society, failing to resolve the inequality issues that many stakeholders hope to address. One significant drawback is the taxation of vacant land, based on the misconception that vacant land reflects inefficient land use because investors hoard it for speculative purposes. This has led to the push for taxing vacant land.
However, in reality, owners of vacant land may not be holding onto it for speculative profit from future price bubbles. Instead, they face uncertainty in choosing the appropriate land use that aligns with changing future fundamentals (not merely speculating on bubble prices). For example, the rising prices of vacant land in Bangkok a few years ago were due to fundamental economic changes associated with the development of a more comprehensive subway system in the area.
Thus, while there is a push for taxing vacant land, the reality is that owners may not be holding onto it for speculative reasons. They are often waiting for sufficient information regarding the right timing and suitable land use in the long term. Therefore, having vacant land does not indicate inefficient land use; rather, it reflects a dynamic approach to land use amid uncertain futures and high costs of making incorrect land use decisions. Taxing vacant land cannot expedite the timing for owners to transition it into productive use, as they still need to wait for adequate information to make informed decisions.
The policy conflict regarding (a) the desire to tax agricultural land at lower rates to support farmers and (b) the desire to tax vacant land at higher rates to penalize land speculators may inadvertently incentivize owners of vacant land to evade taxes by converting it into temporary agricultural land to benefit from lower tax rates, as reported earlier this year. Thus, the vacant land tax has become a weakness that needs urgent reform, as it not only fails to reduce inequality but may also lead to smaller landowners losing their properties to larger landowners.
